Question

On June 1, 2021, Royal Property Management entered into a one-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2021. Under the terms of the contract, Royal will be paid a fixed fee of $60,000 and will receive an additional 10% of the fixed fee at the end of the contract provided that building occupancy exceeds 80%. Royal estimates a 25% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.

Assume that Royal accrues revenue each month, and estimates variable consideration as the most likely amount. On November 1, Royal revises its estimate of the chance the building will exceed the 80% occupancy threshold to a 60% chance. What is the total amount of revenue Royal should recognize on this contract in November of 2021?

Answer 1

Revenue recognized till October'2021 (i.e. from July'2021 to October'2021)=$60,000/12*4=$20,000

Revenue to be recognized till November'2021 (i.e. from July'2021 to November'2021)= $(60000+6000)/12*5=$27,500

Total Revenue to be recognized in November'2021= $ 7,500 ($ 27,500-$20,000).

Note:-Since the probability of building occupancy exceeding 80% has changed in November'2021, hence following the most likely outcome method for recording variable consideration, additional fee @ 10% of $ 60,000 i.e. $ 6,000 is required to be considered in contract price for calculating revenue.